As of late, many individuals whether straight out of university or well into retirement seem to have more and more plans to travel and see the world. I personally enjoy travelling and seeing new places around the globe, experiencing all the differences from home. From the beaches in Australia to the Thermal Baths in Budapest, every stop along the way presents a unique experience that travellers never forget.

When investing money however, individuals have a tendency to behave the opposite and keep their investments close to home; allocating a high percentage of their investments domestically rather than diversifying across foreign markets. In Canada, our physical landscape on the map is large, however, the global weight in the equity market is relatively small.

Size of the Canadian Equity Market

Canada's weight in the global equity market equates to about 4%, however, the percentage of domestic equites held in Canadians portfolios typically resembles 60%. This ultimately means that Canadians have a home bias of 56%.

Sector Concentration

Not only does the Canadian market make up a small portion of the global equity market, but here in Canada we have a heavily concentrated market. When comparing the MSCI Canada Index vs. the MSCI ACWI (Global Index) as at July 31, 2018, the top three sectors and "other" are as follows:

 

As shown above, the financial, energy, and materials sector in Canada accounts for about 73% of the equity market, whereas the top three sectors in the global market being IT, financials, and consumer discretionary account for less than 50% of the market as a whole. The concentrated Canadian market makes diversification even more challenging.

CPP Example – Then and Now

The CPPIB is the Canadian Pension Plan Investment Board, which is a professional investment management organization that invests the funds of the CPP on behalf of Canadian Contributors and beneficiaries. The CPPIB states that "investing internationally allows us to avoid an over-reliance on Canada's relatively small capital markets and domestic economy. In this way the Fund can benefit from positive global growth in the world's largest investment markets – and be resilient during periods of slow growth within specific regions."

Below is a geographical representation of the global investments in the CPP portfolio. Looking back to March 31, 2006, depicted in the first illustration, the portfolio looked much different. There was approximately 64% invested in Canada and 36% invested globally as shown below as well. The second illustration is at March 31, 2018.

 

Take Away

Having more than 4% in Canadian equities is reasonable, however, one must pay attention as to how much of their entire portfolio is invested in Canadian equities. The idea of investing all your wealth in one stock and not diversifying is generally not a good idea. By participating in the global market, your portfolio diversification will increase with not only geographic exposure but also sector exposure as well. Diversification tends to help reduce volatility and allows participation along various different investments.

Sources

Vanguard Canada

MSCI Inc.

CPP Investment Board